Although a corporate parent and its subsidiary may be unified in structure, that may not be enough to disqualify a law firm that is involved in suing the subsidiary while representing the parent.

That’s the message the U.S. District Court for the Southern District of New York recently sent via its decision in HLP Properties, LLC v. Consolidated Edison Co. of N.Y., in which it turned back defendant’s effort to disqualify Gibson, Dunn & Crutcher LLP as plaintiffs’ counsel in an environmental clean-up suit.

Long-running representation

The plaintiffs in the CERCLA case are past and present owners and developers of a New York City land parcel. Represented by Gibson Dunn through a litigation partner in the firm’s New York office, the plaintiffs sued Consolidated Edison of New York in March 2014 seeking reimbursement for pollution remediation costs. Gibson Dunn began representing plaintiffs in connection with the site 15 years earlier, in 1999, and the firm was in contact with ConEd of New York throughout the protracted negotiations between the parties.

Representing parent, too

In 2003, ConEd of New York’s parent company, Consolidated Edison, retained Gibson Dunn for general corporate matters, through a corporate partner in the firm’s Washington, D.C. office. Gibson Dunn did not seek any waivers; its engagement letter with the parent company stated that by representing the parent, it was “not undertaking the representation of any related or affiliated … entity, nor any … subsidiary…” In opposing plaintiffs’ disqualification motion, the corporate partner affirmed that he never provided advice directly to ConEd of New York, or represented the subsidiary in any way.

Unified structure

The court noted the “significant overlap” between the subsidiary and its parent, including:

shared management, including officers and the legal department;

shared corporate headquarters;

unified computer system;

same payroll system;

unified human resources department and benefit plans.

Further, the corporate secretary (who serves both the parent and subsidiary) affirmed that ConEd of New York is the parent’s principal subsidiary, generating 84% of the parent’s operating revenues.

Motion to disqualify

Five months after suit was filed against ConEd of New York, its counsel advised Gibson Dunn that it had just learned that the firm was concurrently representing the parent entity, and demanded that Gibson Dunn withdraw. Following Gibson Dunn’s refusal, defendant moved to disqualify the firm.

Impact of “operational commonalities”

The district court refused to disqualify Gibson Dunn. The court agreed that the firm had never directly represented defendant ConEd of New York. The question remained, however, whether the many “operational commonalities” between ConEd of New York and its parent meant that by virtue of having represented the parent, Gibson Dunn was required to deem the subsidiary also to be a client for purposes of analyzing the potential conflict of interest.

Given the very many common elements between the parent and subsidiary, the court said the answer was “Yes” — that ConEd and its subsidiary “are the same corporate entity for conflicts purposes.”

“Tactical considerations” and lack of “trial taint”

Nonetheless, the analysis does not stop there, the court held. First, the record did not indicate any conflict in loyalties or diminished vigor in Gibson Dunn’s representation; and the firm had already represented plaintiffs for 15 years without complaint from ConEd.

Second, the court found no evidence that there would be risk of “trial taint” if Gibson Dunn were allowed to continue to represent plaintiffs, because the firm’s dual representation involved unrelated subjects, as well as different Gibson Dunn departments, offices, and legal entities (i.e., a parent and a subsidiary). Affidavits convinced the court that the Gibson Dunn team representing the plaintiffs had not received any confidential information that would bear on the case.

Third, the court pointed to the timing of the defendant’s disqualification motion, which suggested “that tactical considerations may have played a role.” It was only on the day that defendant’s litigation counsel discovered the conflict, and “the potential tactical benefits of ousting Gibson Dunn from the litigation” that ConEd of New York demanded that Gibson Dunn withdraw — although the ostensible conflict had existed since 2003.

Significantly, the court held that the outcome of the disqualification motion might have been different but for one additional consideration: the prejudice that plaintiffs would suffer if Gibson Dunn were disqualified. This was of critical weight to the court, given the long-running dispute over the land parcel, and Gibson Dunn’s involvement with it over a 15-year span.

Unity-of-interest test

The opinion in HLP Properties is an interesting recent application of the “unity-of-interest” test that the ABA enunciated nearly 20 years ago in its Formal Op. 95-390 (available on LEXIS and Westlaw and for purchase from the ABA). That test, like the “operational commonalities” the court analyzed here, examines the degree to which the affiliated entities are unified; the more unity, the more likely it is that you will need to treat the affiliates as one client for conflicts purposes — and obtain consent before representing an adverse client.

Although the presence of other significant factors convinced the court in HLP Properties to turn back the disqualification attempt, those factors are not found in every case. And when considering at the front end of a representation whether you have a conflict involving corporate affiliates, the unity-of-interest test may still provide the watchword.

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